CUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks

Must Read

List of United Bank for Africa (UBA) Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number that usually identifies both the bank and the branch where an account is held. The sort...

List of Access Bank Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number which usually identifies both the bank and the branch where an account is...

How To Block Your Bank Account And SIM Card In Case Of Emergency

Losing your phone and wallet or having them stolen can be very frustrating. However, in case that happens to...
- Advertisement -

HONG KONG, CHINA – Media OutReach – 29
October 2020 – The unprecedented COVID-19 pandemic
has posed severe challenges for the global economy and supply chains have been
in the eye of the storm. Amid heightened geopolitical tensions, some countries
are considering moving supply chains out of China. However, as a recent
research study by The Chinese University of Hong Kong (CUHK) reveals, cutting
ties with China might not help firms to mitigate risks.

“In many parts of the world, there’s been concern that global
supply chains were over-reliant on China, now widely regarded as ‘the
world’s factory'”, says Jing Wu,
Assistant Professor of Department of Decision Sciences and Managerial Economics
at CUHK Business School and one
of the authors for a new study.

- Advertisement -

Such efforts include reported
talks
in August between Japan, India and Australia to establish a
trilateral effort, named the Supply Chain Resilience Initiative, to build
stronger supply chains and to reduce dependence on China. Earlier in the year,
Japan also earmarked US$2 billion to help its companies shift production out of
China and back onto its shores. Across the Pacific, both the Trump administration
as well as Democratic Presidential nominee Joe Biden have signaled
that post-election they would seek to end the U.S.’ reliance on Chinese
manufacturing.

“We live in an increasingly interconnected world, so
much so that having supply chain relations with other regions when the pandemic
hit China didn’t mitigate credit risk at a time when credit risk for firms with
ties to Chinese supply chain partners was increasing,” says Prof. Wu in
discussing the results of his latest study The
Impact of COVID-19 on Supply Chain Credit Risk
.

 

- Advertisement -

“When the pandemic spread to the rest of the world and
recovery started in China, having supply chain linkages to China was beneficial
for the companies as the rest of the world was going through economic shutdowns
or slowdowns,” he says.

 

The research was conducted by Prof. Wu in collaboration with
Prof. Senay Agca at George Washington University, Prof. John Birge at
University of Chicago and CUHK Business School Ph.D. student Zi’ang Wang. The
researchers examined how supply chain activity reflects into credit risk during
different phases of the COVID-19 pandemic.

 

- Advertisement -

They specifically looked into spreads on credit default
swaps, or CDS — a type of financial instruments which allows credit risks to be
hedged, and its relation to U.S.-China supply chain links. The study mainly
reviewed CDS data in two phases of COVID-19: when the Chinese economy shut down
between January 31 to February 29 and when the Chinese economy reopened between
March 1 to April 6.

 

“By exploring two phases of the pandemic, we find that
supply chain disruptions and resumptions substantially affected the credit risk
of U.S. firms during the pandemic. Credit risk increases with supply chain
disruptions due to economic shutdowns and decreases when supply chain activity
resumes when the economy opens,” says Prof. Wu. The effects were
economically significant, increasing CDS spreads by around 6 percent to 7
percent during disruptions and improving credit risk by 16 percent 29 percent
when supply chain activity resumes during the reopening of the economy.

 

The study also points out that the resumption of supply
chain activity in China seems to have a more pronounced effect on improving
credit risk than during supply chain disruptions when the pandemic spread in
China.

 

Household
Demand Factor

Prof. Wu and his collaborators then looked into specific
industries to find out which sectors were more vulnerable to supply chain
disruptions. They found that sectors that are more closely related to household
demand, such as electronics and consumer goods, did not benefit as much as
other sectors when supply chain activity was improved during phase two of
COVID-19 in China. The resumption of supply chain activity in China did not
reduce the credit risk for these sectors due to low household demand in the U.S.

 

According to the study, sectors such as oil and gas and
manufacturing were more directly affected by disruptions and the resumption of
supply chain activity. The CDS spreads for these sectors increased during
periods of disruptions and decreased with resumptions.

 

However, it was a different picture for the U.S. companies
that had Chinese customers. When the Chinese economy re-opened in phase two,
increasing household demand in China, the CDS spreads of the consumer goods
sector reduced considerably for the U.S. firms with links to Chinese customers.

Read Also:  Hugill & Ip, Solicitors Continues to Expand its Practice - Enhancing Private Client & Family and Employment Flagship Areas

 

“Since this is the period when the U.S. economy shut
down, having access to Chinese markets was beneficial for U.S. firms with
Chinese customers, particularly for those in the consumer goods sector,”
Prof. Wu explains. Among other sectors, firms in the oil and gas industry that
work with Chinese customers also have reduced credit risk when the Chinese
economy reopened.

Read Also:  MedTech Startup See-Mode Technologies Receives FDA Clearance for AI Software That Automatically Analyses and Reports Vascular Ultrasound Scans

 

Firm
and Supply Chain Characteristics

In terms of firm characteristics, the researchers found that
firms that were investment-grade, with more cash and more growth opportunities
were less affected by supply chain disruptions during the pandemic. In
addition, firms with high leverage were more vulnerable to supply chain
disruptions but also benefited more when activity resumed.

 

“Investment-grade firms are further away from the
default boundary and therefore have the ability to withstand adverse
developments. Firms with more cash holdings also have more buffer in such
situations. In addition, growth opportunities appear to allow firms to shift to
other businesses when production or customer demand changes during the
pandemic,” Prof. Wu explains.

 

Firms that operate in highly concentrated industries, where
a small number of firms made up for a high proportion of production, were
affected more by supplier disruption but less from customer disruption, as
these firms have a lower risk of losing market share. This contrasted with
firms in sectors where products were similar and competition fierce. As firms
were more substitutable, they were more vulnerable to supply chain dynamics.
Firms with more capital could also better adjust to supply chain driven changes
and thus they were less affected during supply chain disruptions.

 

Furthermore, companies with longer supply chains suffered
from amplified credit risk as these relations are harder to substitute.
Upstream sectors were less affected from reduced demand in China as it might be
easier for these firms to find substitute markets. According to the study,
these firms also recovered faster when supply chain activity resumed. On the
other hand, when firms were more central in the supply chain network, their
credit risk was less affected by disruptions in any particular individual supply
chains.

 

The study complements the current discussion about the
impact of COVID-19 supply chain disruption on firm credit risk and it is also
the first to consider supply chain disruptions with household demand within the
context of supply chains.

 

“We bring evidence of how supply chain disruptions
affect firms as economies move to different phases of the pandemic. These
results have implications for other forms of regional production or consumption
disruptions and the impact of global supply chains on propagating or mitigating
such shocks.”

 

Reference:

Agca,
Senay and Birge, John R. and Wang, Zi’ang and Wu, Jing, The Impact of COVID-19
on Supply Chain Credit Risk (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3639735

 

This
article was first published in the China Business Knowledge (CBK) website by
CUHK Business School: https://bit.ly/2IYgSr3.

About CUHK Business School

CUHK
Business School comprises two schools — Accountancy and Hotel and Tourism Management — and four
departments — Decision Sciences and
Managerial Economics, Finance,
Management and Marketing. Established in Hong Kong in 1963, it is the first
business school to offer BBA, MBA and Executive MBA programmes in the region.
Today, the School offers 10 undergraduate programmes and 18 graduate programmes including MBA, EMBA,
Master, MSc, MPhil and Ph.D.

In the Financial
Times
Global MBA Ranking 2020, CUHK MBA is ranked 50th. In FT‘s 2020 Executive MBA ranking, CUHK EMBA is ranked 15th in the world.
CUHK Business School has the largest number of business alumni (40,000+) among
universities/business schools in Hong Kong
— many of whom are key business leaders. The School currently has more than 4,800
undergraduate and postgraduate students and
Professor Lin Zhou is the Dean of CUHK Business School.

More information is available at http://www.bschool.cuhk.edu.hk or by
connecting with CUHK Business School on:

Facebook: www.facebook.com/cuhkbschool

Instagram: www.instagram.com/cuhkbusinessschool

LinkedIn: http://www.linkedin.com/school/cuhkbusinessschool

WeChat: CUHKBusinessSchool

CUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks

- Advertisement -
CUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks - Brand SpurCUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks - Brand Spur

Subscribe to BrandSpur Ng

Subscribe for latest updates. Signup to best of brands and business news, informed analysis and opinions among others that can propel you, your business or brand to greater heights.

- Advertisement -
CUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks - Brand SpurCUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks - Brand Spur

Latest News

The new 2022 Volkswagen Golf R brings more power, tech and fun than ever before

It has been just under two decades since Volkswagen revealed the first Golf R32, a then-unexpected combination of the...

WorldRemit Launches a New Price Drop on Transfers to Nigeria this Black Friday

WorldRemit, a leading global digital payments company, has announced the launch of its new zero percent pricing for international transfers to Nigeria. The new lowered...

MTN enhances Business Growth at ICT and Business Skills Programme

MTN Nigeria, as part of its ICT and Business Skills programme, hosted young Nigerians to a capacity-building workshop. The workshop was facilitated by trainers...

Orange launches its 5G network by making quality of service its priority

Orange announces the launch of its 5G network in 15 French municipalities, as of 3 December 2020, including Nice, Marseille, Le Mans, Angers and...

BREAKING: Konga Bulk offers 35,000 laptops, PCs, others at huge discounts Friday

Konga, Nigeria’s foremost e-Commerce giant, is set to make available over 35,000 units of laptops, Personal Computers (PCs), tablets and complimentary printers at giveaway...
- Advertisement -
BrandsPur Weekly Cartoons
- Advertisement -CUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks - Brand SpurCUHK Business School Research Looks at Why Global Efforts to Move Production Away from China May Not Mitigate Supply Chain Risks - Brand Spur